The implementation of the One Big Beautiful Bill Act (OB3) came with a host of changes for tax-exempt entities. This summary of our recent webinar, “Navigating OBBBA Tax Reforms for Exempt Entities,” explores the impact of expanding excise taxes on institutions, revisions to clean energy tax provisions, and OB3 changes that may affect reporting for tax-exempt organizations.
Excise Tax Expansion
Internal Revenue Code Section 4960 levies a 21% excise tax on tax-exempt employers who pay more than $1 million in compensation or parachute payments. Section 4960 currently only applies to an organization’s top five most highly compensated employees. However, under the OB3, the excise tax now applies to all employees, effective for tax years beginning after December 31, 2025.
The excise tax initially targeted private colleges and universities with assets exceeding $500,000 per student, but it now applies to institutions with more than 3,000 students (up from 500). While this change exempts smaller institutions, larger ones face a tiered tax rate structure: 1.4% for endowments between $500,000 and $750,000 per student, 4% for $750,000 to $2 million, and 8% for endowments exceeding $2 million. In addition, income from student loan interest and federally funded research royalties is now taxable under this provision.
Clean Energy Tax Provisions
The OB3 revised several clean energy tax provisions, including an accelerated timeline for solar and wind, where credits apply for construction starting before July 4, 2026 and placed in service by the end of 2030. If construction starts after July 4, 2026, the project would have to be placed in service by the end of 2027 to gain the credit. This significantly shortens the window for tax-exempt entities to take advantage of the credit. There are also new foreign entity restrictions that limit the sourcing of materials for projects initiated after 2026, targeting countries such as China that produce much of the world’s solar panels.
Other clean energy opportunities remain viable in addition to solar and wind. Tax-exempt entities can still claim full credits for projects such as geothermal heat pumps and battery storage through 2034. The credit will phase down in 2034 and be eliminated in 2036. Tax-exempt organizations can offset project costs significantly through clean energy investments. For example, a community college installing a $2 million solar array could potentially lower costs by $800,000 through credits.
Reporting Impacts for Tax-Exempt Organizations
The OB3 introduced several reporting changes impacting tax-exempt entities. Charitable contribution deductibility now includes a 1% floor for corporations and 0.5% floor for individuals, potentially altering donor behavior. Corporations may want to consider whether certain contributions could be reclassified as a marketing contributions as a marketing advertising sponsorship, which is fully deductible. Individuals may consider “bunching” contributions to allow for larger deductions, such as giving $30,000 in one year instead of spreading it out over three years. The permanent 60% adjusted gross income limit for cash contributions and 30% limit for appreciated assets may also affect donor strategies.
How Forvis Mazars Can Help
Proactive planning and consultation with professionals can help tax-exempt entities navigate changes brought by the OB3. Our tax team can help your organization keep up with legislative changes. If you have any questions or need assistance, please contact us today.